Gains from trade in a Hotelling model of differentiated duopoly

Constructing a two-country Hotelling model of spatial duopoly, this paper explores welfare effects of bilateral reductions in transport costs. We show that welfare in trade is necessarily less than welfare in autarky for any level of trade cost, which sharply contrasts Clarke and Collie (2003) prove Pareto superiority of any trade over autarky in a non-address model. We discuss that gainfulness of trade is crucially affected by whether demand is elastic